Once in a while every business person needs to step back and reevaluate the top KPIs that drive the business results. What you measure is what you get so it is without a doubt an important initiative to reevaluate your current KPIs and metrics.
No purchasing scorecard or any other scorecard is forever but it changes as the business changes with new business models, teams, strategies and tactics.
A small business owner was explaining this morning how she switched from one vendor to another explaining the reasons behind her decisions. What she was actually doing she was learning throughout the last 16 months (since she started her business) about the real issues and priorities for the business.
This is how most small business owners start and change through the purchasing process:
Step 1 – COST:
You are looking for a certain type of vendor or supplier for the first time and regardless of most other important factors you might be aware of – you are actually looking at the price per unit as top priority. While cost is always important you know that it is only one of the drivers to make smart decisions.
However at the beginning small business owners are not able to evaluate other factors like support, on time delivery, reliability, quality…. So it only makes sense to make decision based on price.
Step 2 – QUALITY:
As you improve the knowledge of the products and materials you are getting better at evaluating the quality which includes the value for the money, customer satisfaction, refunds, returns to vendors, slowing down your services, additional quality activities like quality control, ability to give satisfaction guarantees, customer loyalty…. (for more guides on quality management visit our free quality resources). At this point it is obvious that we need to look at more than simply the cost per unit or cost per item.
Step 3 – TOTAL COST OF OWNERSHIP
By looking at the total cost of ownership you are able to categorize all the cost and expenses of doing business that are directly or indirectly related to a certain supplier.
This includes all relevant expenses (both hard and soft costs), financial risks, internal operations or activities tied up in this process, opportunity costs….
For example when comparing vendors who deliver the materials to your warehouse versus vendors where you pick up the materials – the structure of your total cost of ownership will be drastically different. Create a list of all activities related to each of your supplies and rank different vendors on all the steps in the process (learn more about total cost of ownership).
Step 4 – RELIABILITY & EASY TO DO BUSINESS
You will always find suppliers who are willing to go the extra mile, you feel comfortable working with them and you find them reliable. On the other hand in every business there are vendors with limited services and support and sometimes you chose to work with these limitations because you don’t really need more than that.
This is directly related to the importance of the certain supplier in your value chain – how much risk and reliability you are willing to accept which drives the total cost of ownership or cost of doing business.
- Do you need to have relationship with your vendors?
- Do you expect them to adopt to any changes in your needs?
- How much your business depends on this supplier?
These are questions you need to take into account when making purchasing and supply chain decisions.
Now that we have outlined the four categories above let’s consider the purchasing metrics and how related they are to each of these categories or steps. Or simply why don’t you go back and brainstorm your top 3 priorities/purchasing metrics in each of the four groups.
Example Metrics: cost per unit, cost per truck load, cost including delivery, change of price based on number of items purchased, quantity limits….
List your cost related top priorities and come up with simple quantifiable metrics where you can simply write down a number for each of your metric. You will use these same metrics to compare various suppliers and alternatives.
List your metrics:
Example metrics: customer satisfaction measured through number of complaints or number of returns or number of returning customers. Supplier terms and conditions to handle different kinds of returns.
List your metrics:
3. Total cost of ownership
Example metrics: warehouse space, number of deliveries (including loading, unloading and other warehouse activities), payment terms, number of orders per period…
List your metrics (based on the type of the highest indirect costs associated with the supplier):
4. Reliability and easy to do business
This category of purchasing metrics looks at the big picture and this is where you can quantify the risks associated with each vendor activities. It is extremely useful when comparing your current suppliers with potential new suppliers and should be used in negotiating with your suppliers.
Example metrics: number of errors per risk category, number of wrong deliveries, late deliveries…
List your top priorities and metrics: